Phd student serves up ace with quant fund

By mkitchen

Created 12/11/2013 - 06:30

Sam Barnett, the 23-year old founder and CEO of SBB Research Group, is a talented individual. Having first developed a sophisticated trading algorithm as a teenager, Barnett (pictured) went on to launch his quantitative hedge fund as an undergrad at Cal Tech.

Today, Barnett is running the fund whilst studying for a post doctorate at Northwestern University. Oh, and he is also an internationally ranked tennis player.

“I believe in a disciplined and quantitative approach to investing and believe it is possible to achieve above market returns with minimal risk as long as this disciplined approach is applied,” Barnett tells Hedgeweek.

The computer systems that Barnett uses to trade primary US equity options (as well as some international equities as well) run on algorithms that evolved out of the quantitative mechanics work he was doing at Cal Tech. But what differentiates Barnett’s quantitative approach from other quant funds is the sheer variety and source of data that the computer model uses to feed in to the system.

“We have computer systems set up to collect a variety of market data. This is not just normal data on pricing. It ranges from economic indicators, news events etc. The systems process the data and make decisions on the market without being clouded by emotion. They objectively rate stocks from zero to 100. The algorithms then execute options trades based on how those stocks are rated,” says Barnett.

To illustrate the sophistication at work here, Barnett confirms that right now he is studying computation in the brain to try and better understand market dynamics. The more data that gets fed into the system the better it is able to make decisions. As Barnett says, the aim is to utilize as much information as possible to build a clear picture of the world.

“It’s a system that’s capable of learning. I don’t even know how many inputs are going in to the system at any given time; for all I know it could be using different colours of company logos as part of the ranking process.”

Last year, the strategy gained 15.4 per cent. In 2011, despite the S&P 500 index declining 5.5 per cent it gained 4.6 per cent. Furthermore, over the last 12 months the fund’s assets have doubled from USD50million to USD115million (as of mid-2013).

The next step, says Barnett, is to register with the SEC.

“We are very happy with our AuM growth and while the capacity for the strategy is north of USD1billion we want to grow the fund conservatively. The aim is always to do well by our investors. We aren’t looking to scale up as fast as possible. My aim was to reach USD100million by end-2013 so reaching USD115million by mid-2013 was ahead of our expectations.”

Most of the fund’s investors are corporates as well as HNW individuals. The aim, says Barnett, is to offer strong principal protection in the fund, noting that the market has to fall 30 per cent or more for investors to lose any money.

This is due to the way the strategy runs. It’s not all about capturing the upside but actively hedging against market downturns and preserving the bottom line. Consistency of performance is the name of the game.

“If you look at a month like August the market fell by four per cent whereas we still profited; we were up about 1 per cent that month. In general, the US market has been up 50 or 60 per cent of the days in any given quarter, whereas our fund has been up 80 to 90 per cent of the time.”

For highly rated stocks the system will either buy call options or sell put options. The lower the rating, the more a combination of puts and calls are used.

“Our typical holding position is 90 to 110 days. However, we have many positions in our portfolio that we trade more frequently, even daily, and we have some positions that we hold longer than 110 days. Generally speaking the goal is to identify companies who will outperform (or underperform) over a calendar quarter and build the options positions accordingly.”

Given that the portfolio is composed of thousands of options contracts it is highly diversified and sector agnostic. It is not, however, a high-frequency trading strategy. “We run a quant fund and we prioritize principal protection and market outperformance. A lot of quant funds try to maximize returns over short periods of time; we hold positions over a longer time with the aim being to minimize losses and deliver consistent outperformance.”

If Barnett continues to serve up consistent returns we could hear a lot more about him going forward.